Fed should squelch any idea of a ‘Yellen put,’ former central banker says

The Federal Reserve must guard against the perception that there is a “Yellen put” in place to keep the stock market moving endlessly higher, said Jeremy Stein, a former governor of the central bank.

“Markets seem to sense an element of a Fed put, and that complacency can be a source of risk in itself, so you have to push back on that a bit,” Stein said in his first interview, with the New York Times, since leaving the Fed in May and returning to Harvard University’s economics department.

Stein said the central bank should stick to its tightening plan, once launched, even if markets gyrate.

A put refers to a “put option” that protects investors if a price of an asset declines. The idea is that the Fed will always react quickly to molify investors if the markets tumble.

Originally, the “Greenspan put” described actions that the former Fed chairman took in the wake of Back Mondaystock market crash in 1987. But the notion has dogged the Fed ever since, morphing into the “Bernanke put” in 2006.

During his two years at the Fed, Stein was seen as an influential in pushing for more attention to be paid to the risks to financial market stability in setting interest rate policy.

In the interview, Stein said the Fed is feeling its way and investors have to be prepared for greater volatility.

“There is no real precedent for ending anything of this magnitude,” Stein said, referring to the Fed’s ultra easy policy stance of low rates and buying bonds until its balance sheet has swelled over $4 trillion.

Stein added he was comfortable with the official Fed forecast of interest rates reaching 2.5% in 2016 from close to zero at the moment, as long as the economy stays on its current course.